What to Do with Your Tax Refund

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It's a new financial year. Do you know how to spend your tax refund effectively?

Most of us will spend our tax refund paying off bills, according to data from the Australian Securities and Investments Commission (ASIC). The next likely option is to save it.

We're here to argue the case for putting your tax refund on your mortgage. After all, the more you pay off your home loan now, the less you pay in interest later. It's hard to beat the guaranteed rate of return of paying down your home loan, considering ASIC reports that around 84% of Australians will receive a tax refund and the average refund is for $2,574.

Make the most of your tax refund

It's important to work out where this lump sum tax refund can make a difference. Sure, you can spend it getting on top of bills, taking a holiday or going on a spending spree, but these are all short-term gains. Putting it on your home loan is all about thinking ahead to the compound benefit on your interest repayments.

*Let’s look at this hypothetical example:

Take your $2,574 tax return and deposit it as a lump sum payment onto your home loan at the start of a 30-year term. Based on a home loan of $400,000 and an interest rate of 4.42%, the Yellow Brick Road Lump Sum Repayment Calculator estimates you would save $6,617 in interest.

Do this annually with each year’s tax refund and watch these savings escalate.

Enjoy double the benefits if there are two income earners in your family with two lots of tax refunds. Using the above example, make a lump sum repayment of $5,148 to your home loan in just one year to save an impressive $13,083.

Take the first step

Even if you’re not a first home owner and are well-progressed into your loan term, you can still make significant savings. Based on the previous example, let's say you are ten years into your loan term and you make a one-off repayment of $5,148, you can still expect to save $7,175 in interest. Imagine the savings if you were to deposit this repayment on your loan every year.

Be sure to check if your home loan allows you to make additional payments without penalty. Most variable loans will enable you to pay off as much as you want, while fixed-term loans often place limits on how much you can pay off per year or over the fixed term.

Use your offset account

Another excellent use for your tax refund is to put it into a mortgage offset account. Best described as a type of savings account linked to your home loan, any funds in this account are offset against your loan. Because your offset account balance is deducted from the loan's value when interest is calculated, the more you have in your offset, the less interest you pay.

Place a $2,574 tax refund into your offset, and it will immediately start working to reduce your loan.

Any interest you save off your loan will help pay down your mortgage faster, while your offset account balance is still accessible should you need to make a redraw.

Keen to know more about the benefits of lump sum repayments or mortgage offsets? Ask your Yellow Brick Road local representative to crunch the numbers for you on the savings your tax return could bring.

*Example only, this does not take into account your personal circumstances.